Condominium Housing and Mortgage Lending in Emerging Markets--Constraints and Opportunities

Carol Rabenhorst, Sonia Ignatova

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Abstract

International experience suggests that there is a strong causal link between housing demand, housing finance, financial sector development and economic growth. Yet, a housing market cannot flourish without mortgage finance, which allows all but the poorer segments of the population to purchase, expand or improve their homes, or to use the equity in their homes for other purposes, such as major purchases, college education, travel or investment. There is now growing recognition of these connections among policy-makers in developing and transition countries, and among international development donors who wish both to strengthen financial markets and to improve the economic well-being of citizens in their client countries. This paper provides an overview of the constraints and opportunities for condominium housing and mortgage lending in emerging markets.

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Introduction

The link between a vibrant housing market and the overall health of a nation's economy is well-established in developed countries—construction and manufacturing jobs, wholesale and retail sales, population mobility and other factors are directly affected. In many countries, housing data are used as an economic indicator that changes before the economy starts to follow a particular pattern or trend, and predicts the health of a country's overall economy. In the United States, for example, a leading economic indicator is the New Residential Construction Report, known as "housing starts" on Wall Street, a monthly report issued by the U.S. Census Bureau jointly with the U.S. Department of Housing and Urban Development (HUD). A downward trend in housing data was an early harbinger of the current economic upheaval in the United States.

On the other hand, a well functioning housing market can provide large external benefits to the overall economy, including the following:

• Better overall living conditions for families who can access and improve their shelter.
• Improved urban infrastructure, since housing demand stimulates utilities, schools, transportation and the like.
• Enhanced economic and social mobility within urban markets and regionally.
• Improved labor market mobility, diversity and accessibility.
• Increased motivation to save.
• Increased consumer spending.
• Increased spending and investment by homeowners who borrow against the value their homes.
• More capital for entrepreneurs who borrow against the value of their homes.

International experience suggests that there is a strong causal link between housing demand, housing finance, financial sector development and economic growth. Through urbanization, the development process generates sharp increases in mobility and relocation, and housing investment increases as a share of GDP. A housing market cannot flourish without mortgage finance, which allows all but the poorer segments of the population to purchase, expand or improve their homes, or to use the equity in their homes for other purposes, such as major purchases, college education, travel or investment. There is now growing recognition of these connections among policy-makers in developing countries, and among international development donors who wish both to strengthen financial markets and to improve the economic well-being of citizens in their client countries.

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